August 2010

Asian markets were getting hit Wednesday morning, chastising Wall Street for the 100-point recovery rally that shaved yesterday's losses in the final third of the session. The market feels toppy enough that we should want to short into whatever modest rally DaBoyz are able to contrive.

Stirred into this week’s lively discussion of inflation/deflation was the notion that although Americans seem to live better now than they did fifty or sixty years ago, our parents and grandparents would be appalled to see how deeply in hock we’ve gone to enjoy the supposed good life. And if the standard of living has risen so impressively, why is it that the single-income, middle-class household of the Fifties could afford things that are barely within the reach of households that today are supported by two incomes? Sure, your neighbor has a composite-frame trail bike that he bought for $4000, another a $30,000 movie room, and your good buddy and his wife went scuba diving in Tahiti last Christmas. But did they have to take out a home equity loan to put their kids through college? And will the kids be able to pay back their fair share out of the meager income they have begun to earn with their $150,000 degrees in business administration, journalism, advertising and English literature? Some readers may recall the scene in the movie Back to the Future where a motorist pulled into a gas station and a swarm of attendants gave his car the kind of once-over that all filling stations routinely provided in the 1950s, checking the oil and fluid levels, and even putting air in his tires.  Setting aside the fact that this mini-inspection, if so princely an amenity were even offered, would probably add 25 cents to the price of each and every gallon of gas sold today, consider that the lowly gas-station attendants were likely in better financial shape than most middle-class couples are today. With his small monthly mortgage payments and easily manageable grocery and medical bills, the filling-station employee probably had enough left over each month (after taxes!) to accumulate a

Dave Rosenberg's latest Gluskin-Sheff report notes that the dramatic collapse in asset values in the past two years has generated severe trauma to the baby boomer balance sheet. Click here  to see this graphically.      

Shhhh. Don't look now, but there's a bottom-fishing opportunity in Gold that could materialize for night owls -- and another in Silver. Since neither has been advertised, these trades could be a great way to start the day.  I've put a nonsense headline above so that the trades don't attract too much attention.

Silver's 15-minute chart looks a bit stronger than Gold's at the moment, so I'd suggest using the pattern shown, adjusting as needed if a lower 'C' is recorded, to get long.  The trade can be tied to a "time stop" of perhaps a minute or two if you don't want to risk a fall below 'C'. ______ UPDATE (2:39 a.m. EDT):  Silver fell without triggering the hypothetical buy described in the chart, but the stage-managed decline that has ensued could open up a bottom-fishing opportunity at 18.075, a Hidden Pivot target nicely visible on the 15-minute chart (A=18.575 on August 9 at 8:30 a.m.).  An 18.580 bid, stop 18.560, is advised. _______ FURTHER UPDATE (10:48 a.m. EDT): On their way down to a so-far intraday low of 17.960, the futures bounced 6 cents from 18.070 -- enough to allow a partial profit, or at least the implementation of a loss-proof trailing stop if you managed the trade using the 1:3 risk:reward ratio that I always recommend. My apologies, incidentally, for the senile mistake of somehow extrapolating an 18.580 bid from an 18.070 pivot. As someone in the chat room figured out, the trade made sense if you took out the numeral '5' .

Night owls can use the target shown in the chart to get long with an 1197.10 bid, stop 1196.70.  Alternatively, if the futures reverse to create a bullish impulse leg on the 15-minute chart without having reached the target, you should get long at the first signaled point 'X'. _______ UPDATE (10:41 a.m. EDT):  The futures took a $2.50 bounce from 1197.00 on their way down, so it was easily possible to have taken a profit on  the trade.  The subsequent breach of the pivot warned of the weakness that was to follow and which persists even now.

Five days' worth of amazingly boring action have not altered the fact that minor targets not far above continue to beckon the futures higher. A well-advertised one at 1136.50 -- short there, stop 1137.25, if you please -- will still serve nicely as our minimum upside objective, but we should also be prepared for this brick to fall out of orbit if the deathly feeble buying that has held it aloft should one day dry up completely.  Diligent traders should look for bearish camouflage opportunities on the 5-minute chart. _______ UPDATE (10:54 a.m. EDT):  The futures fell hard this morning after having provided no low-risk opportunities to get short overnight. Even on the two-minute chart there were no abc down-patterns with the single-bar 'c' we require for 'camouflage'.  In retrospect, the only play was to have shorted the manipulated head-fake that occurred on the day's session's opening bars.

Yesterday's asphyxiating, range-bound slog, which baby-stepped the Diamonds to within 0.24 points of a 107.61 target, killed my appetite for the trade, but we'll do it anyway because the target itself remains valid.  Short there however you please, but I'd suggest stopping yourself out if the September 104 puts go into the red by 20 cents or more.  We'll also need to be alert to the possibility that yesterday's rally, close as it came to the target, may have been a final gasp of at least short-term importance.  We are currently long a bear put spread three times @ 0.76 — short three August 102 puts against six long August 98 puts.

We’re running the commentary below for a second consecutive day because it drew such a heavy and varied response in the Rick’s Picks forum.  Surprisingly, no one rose to Milton Friedman’s defense, although one reader traced the current state of the Dismal Science, such as it is, to economist Irving Fisher, who achieved notoriety for declaiming very publically just before the 1929 Crash that “stock prices have reached what looks like a permanently high plateau.” The professor subsequently went back to the drawing board for some serious reflection on deflation, so it’s possible he’ll return to vogue at some point, or at least have his probably undeserved reputation as a laughing stock mitigated by sure-to-be-growing legions of anti-Keynesians. Tomorrow we’ll have more to say about a particularly interesting thread in the discussion that implicitly challenges the more or less universal notion that America’s standard of living has soared in the last fifty years. In fact, over the last two decades, it has become painfully obvious to most Baby Boomers that their single-income parents could afford quite a few things that dual-income households these days cannot afford without going seriously into hock. Regarding the supposed debate between inflationists and deflationists, it seems, blissfully, to have petered out. We assume this is because evidence of serious inflation is almost nowhere to be glimpsed, even by those who are obsessed with Friedman’s evidently misleading explanation of  inflation – i.e., that it is purely a monetary phenomenon (see below).  We would nevertheless still welcome that wake-up call we’ve repeatedly asked inflationists to provide if there comes a day when we can sell our home for a zillion dollars. No ‘Food Inflation’ Below is the commentary that ran on Monday. There are also dozens of gem-like responses in the forum that we would urge you to read before weighing in